The global economy is a complicated entity that relies on accurate information about financial trends, something that was missing at strategic times during last week's market meltdown.
Indeed, the trigger for the domino effect that plunged stock markets from Asia to Wall Street began in China where the sell-off resulted from rumors the government was going to impose stringent measures to slow down its overheated economy. But those rumors appeared to be unfounded in a supersecret authoritarian bureaucracy where transparency is nonexistent.
China has been attempting to slow its economy for years, something, ironically, we've been pushing them to do. But as Bear Stearns economist David Malpass noted last week, the China sell-off was "valuation related" and resulted, understandably, in cooling down its overvalued stocks.
A memo by Bear Stearns' Hong Kong-based strategist Michael Kurtz on Jan. 16 warned "China (Underweight): Valuations now excessive, stocks are over-owned, and liquidity support may be moderate."
Back in the United States, the markets were spooked by the spreading global sell-off but also by a variety of less-than-accurate reports -- the most egregious being the story that Alan Greenspan was predicting a recession later this year.
Dow Jones Newswires ran a headline, saying "Greenspan: Recession in U.S. 'Possible.'" Bloomberg News Service said, "Greenspan says U.S. may slip into recession."
In fact, he predicted nothing of the sort, and even a cursory reading of what the former Federal Reserve chairman said in remarks via satellite at a global business conference in Hong Kong shows that quite clearly. Story after story, even after the markets' steep decline Tuesday, flatly reported that he saw a possible recession in the near future, without all of the caveats and modifiers for which Greenspan is famous when he talks about hypotheticals.
Here's what he said: "While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting (growth) forward into 2008 ... with some slow down." He went on to describe conditions in the global economy as "benign and stable," a view that is consistent with economic forecasters here and abroad. And he said both the United States and global economies were far more resilient now than ever before, partly as a result of increasing global liquidity.
In short, Greenspan's "widely reported comments weren't nearly as negative as the headlines portrayed," Malpass told his clients. But the r-word he uttered dominated the headlines and, in the 24/7 news world we live in, that message contributed to Wall Street's jitters and helped to push it into the tailspin we saw last week.